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SPERI Panel: ‘The future of European varieties of capitalism- convergence, divergence or
continued diversity?’
‘Stuck with Austerity? Time to Bring Politics and National Varieties of Capitalism back in’
Eleni Panagiotarea, Hellenic Foundation for European and Foreign Policy
Abstract
The Euro crisis has shown that combining distinctive varieties of capitalism in Europe under a
single currency has failed. At the same time, current attempts to build a ‘new’ economic
governance as well as re-ignite growth continue to ignore the institutional asymmetries of
the political economies constituting the euro area. Symptomatic of the strategic inability to
move beyond the crisis is the endeavour to depoliticise austerity- that is, remove austeritybased economic programmes from public deliberation and present them as the only
available policy choice for restoring the confidence of the markets. National and Brussels
elites, however, who choose to ignore the continuing diversity of economies and political
institutions face the worst of all worlds: austerity is engineering a major redistribution of
income in the affected member states, creating unequal social outcomes for large parts of
their population and threatening political stability; it also points to the asymmetry of burden
sharing in a monetary union, where trade deficits are mirrored by trade surpluses. In both
these respects, austerity is deeply political, with deep and divisive implications. For the Euro
and the European varieties of capitalism to have a future, pace Germany’s entrepreneurship
and its wrongful projecting of its own economic miracle on to the euro area, national and
Brussels elites need to make a convincing and very public case for re-balancing the oversized public sector and the shrinking private sector. Whether making domestic markets more
competitive and inclusive or removing recalcitrant high-ranking civil servants from
adjustment programme implementation, adopting growth strategies- in energy, the health
sector, or exports-, must be seen to be political. The proposed paper adopts a varieties of
capitalism perspective in order to ‘match’ national institutions with the success (or failure) of
their economies and gauge the extent to which the new economic governance proposed
stands a chance- given different national growth models- to secure the kind of Eurozone
growth that will keep the Eurozone afloat.
Keywords: Euro crisis, political economy, varieties of capitalism, austerity, growth
Introduction
Getting stuck into austerity is not necessarily a bad thing. There are, supposedly, good and
bad ways for lowering budget deficits; the good ways ensure that fiscal sustainability and
economic growth potential can be mutually reinforcing. Getting stuck into Eurozone-induced
austerity, however, appears to be a bad thing. Austerity is quite simply hurting growth,
propagate the critics, backed by hard economic data. With much of the austerity vs. growth
debate being framed in simplistic and simplifying dichotomies, however, the Eurozone crisis
has yet to contend with the way national varieties of capitalism produce diverse and
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asymmetric outcomes for the political economies and citizens of a less than optimal
monetary union.
Institution building, in the form of new economic governance rules, a substantial financial
firewall and a mechanism to function as a precursor to eventual Banking Union, has proven a
sensible half-way between what is economically feasible and what is politically acceptable.
As Eurozone authorities have not been able to resolve conflicts over distribution of wealth
and income, however,- critical to both coming to grips with the aforementioned asymmetry
and to re-igniting growth-, the current institution building must be considered a work in
progress. Using the Varieties of Capitalism approach, the paper argues that bringing national
politics back in gives governments the possibility of co-ordinating their growth models with
those of others in a more equitable manner, generating growth which contributes to the
well-being of their citizens, while respecting intergenerational fairness; this is the only kind
of growth that can guarantee the continued existence of the Eurozone.
A Eurozone Universe of ‘Coordinated’ and ‘Mixed’ Economies
The way national political economies condition economic performance has been a matter of
recurring study, particularly following the seminal publication of Hall and Soskice’s ‘Varieties
of Capitalism’ (2001). At the core of the approach, lie the ideas of ‘complementarities’ and
‘systems coordination’ which explain both how institutional subsystems (which govern
capital, labour, and product markets) can increase the performance of the system as a whole
and how they can create, in response to external pressures for change, paths for
adjustment. Joining a currency union constitutes more of a ‘shock’ in this instance,
challenging both the system whose existing equilibria may be disrupted and the ‘Varieties of
Capitalism’ approach (henceforth VoC) confronted with the task of analysing the process.
Surviving in a monetary union unavoidably poses a further set of analytical challenges- VoC
analysts have certainly had foresight when they suggested that unless Europe can generate
‘another wave of prosperity’, the emergence of ‘a new era of political conflict’ (Hancké,
Rhodes, and Thatcher, 2007: 83) cannot be discounted.
The Eurozone universe is broadly inhabited, following VoC, by two types of economies,
‘coordinated’ market economies on the one hand (with Germany offering the most typical
example) and ‘mixed’ market economies on the other- as hybrid types, they ‘do not classify
definitely as liberal or coordinated market economies’ (they include Portugal, Spain, France,
and Italy, Hall and Gingerich, 2009, 179 n.61). In their original classification of liberal and
coordinated economies, Hall and Soskice intended to turn the focus ‘on the dimensions of
difference consequential for national policy and performance’ (Hall and Soskice, 2003: 244).
Defined in a rather stylized form, ‘coordinated market economies’ create an environment,
whereby firms rely primarily on non-market relationships to coordinate their activities with
other actors and to build up their core competencies (Hall and Soskice, 2001: 8); mixed
economies, on the other hand, operate within a framework of state-driven development,
whereby firms lack the coordinated systems for skill formation or the capacity for
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incremental innovation, while trade unions and employers fail to coordinate on wagesetting, except for the occasional social pact.
The central analytical point that arises from this categorisation is that the institutional
infrastructure of the political economy conditions the kind of strategies that firms can
pursue effectively and the kind of policies that governments are likely to follow (Hall and
Soskice, 2001: 37). Embedded in a web of relationships, with suppliers of labour, capital,
technology, and other firms, firms seek to secure comparative advantage which is ultimately
what governments also seek to secure, as it feeds into national economic performance.
Moving to the European level, it is fair to assume that governments that voluntarily joined
the Eurozone calculated that this particular set up would further their and their firms’
competitive advantage: the common currency would increase price transparency, eliminate
currency exchange costs, support broader and deeper integration of markets for goods,
services, and financial products and facilitate international trade. With hindsight, a rather
naïve guiding premise was behind the Euro institutional construction: competing within a
single market under a single currency would trigger institutional convergence; As firms
aimed to prosper, engaging with other actors in multiple spheres, their governments would
respond by reforming the domestic regulatory environment and setting up the appropriate
structures for strengthening competitive advantage: tighter market integration would
accelerate the institutional and productivity convergence promised by the European
integration process (Bertola, G: 2013, 2)
At that point, and leaving aside the entire optimal currency debate, two important factors
were overlooked: first, EMU governance was not ‘neutral’. Applying a single monetary policy
and a single exchange rate to a diverse group of countries (Moravscik, 2012:55), which
further got to retain national responsibility for financial regulation and fiscal policy, meant
that some national varieties of capitalism would stand to gain, while others would lose; and,
second, the type of comparative institutional advantage that national economies either
enjoyed and had secured or, reversely, others had failed to acquire, would produce distinct
adjustment paths to pressures for change.
Asymmetries spell failure
If anything, the Euro crisis has shown that combining distinctive varieties of capitalism in
Europe under a single currency has failed. For one, firms and governments in the periphery
stuck to the demand-led growth strategies that they were familiar with; growth was led by
the expansion of domestic consumption which was, in turn, facilitated by macroeconomic
policies that were often expansionary, typically covered cyclical downturns, and finally,
tolerated if not accommodated asset booms. While the exchange rate was no longer
available as an adjustment mechanism, periphery countries’ public and private sectors
gained access to cheap capital; as a result, they embarked on large-scale foreign borrowing
to keep expanding their import-driven economies. Coordinated economies, on the other
hand, found a new environment to pursue their export-growth strategies. These were
marked by coordinated wage restraint, which kept unit labour costs down, investment in
skill formation allowing firms to produce high value added products, and a macroeconomic
stance with a contractionary bias.
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The graphs below suggest that demand-led strategies were going to be unsustainable in the
long-term. At the time, however, in fact for almost an entire decade, they seemed like a
good idea. As (per capita income) growth expanded, and as long as governments in the
periphery had market access and private investment inflows, they had no real incentive to
change the institutional organisation of their political economy. Their cardinal mistake was
that they failed to use cheap capital in order to proceed with productive investments that
would enable them to repay and service the accumulated foreign debt and improve the
competitiveness of their economies.
[Graph 1 about here]
[Graph 2 about here]
The cardinal mistake that has been committed since, is not recognising how EMU-generated
imbalances have played out, piling upon the institutional asymmetries of the political
economies constituting the euro area. As a result of this lack of diagnosis, the credit booms
and the perverse effects of negative real interest rates, the real exchange rate
misalignments within the euro area, the current account imbalances and the role of capital
flows from northern to southern Europe as well as their subsequent sudden reversal have
been either considered less relevant or merely symptomatic of the underlying fiscal
imbalances (Pisani-Ferry, 2012: 2-3). Accordingly, periphery countries and their mixed
economies which could not have possibly moved to an export-growth model overnight have
been expected to implement rapid structural reforms in order to boost their
competitiveness in export- and import-competing industries; the fact that they are still
reliant on the pace of demand growth in the euro area core countries and the rest of the
world has not really registered in public debate, or Eurozone politics for that matter- core
country ‘behaviour’ repeatedly indicates that burden sharing is not a policy priority and
certainly not a political one. As growth has become a moving target, however, failure to
achieve sustained productivity gains (allowing for early gains in labour productivity) suggests
that adjustment has been occurring primarily through ‘lower wages and slower growth in
domestic consumption and investment spending’ (Higgins and Klitgard, 2011: 9).
Embracing Austerity: A Case of Tough Love
There have broadly been two ways of thinking about austerity and growth. Embedded in
moral rhetoric that echoes the evils of fiscal profligacy in the South, the first holds that
austerity can help governments balance their budgets and bring the debt level down to an
acceptable level as a share of national income. Punishment aside, fiscal adjustments can, in
fact, be growth enhancing; what matters for growth is ‘the composition of the fiscal
adjustment’, rather than its size. In this respect, ‘fiscal adjustments associated with higher
GDP growth are those in which a larger share of the reduction of the primary deficit-to-GDP
ratio is due to cuts in current spending, to the government wage and non-wage components,
and to subsidies’ (Alesina and Ardagna, 2009:14). Governments that are in a position to see
the cutting process through are, therefore, expected to restore their citizens’ faith in their
ability to re-ignite growth and regain investors’ confidence in the bond markets.
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The second line of thinking holds that austerity must be fine-tuned and not applied in a
blanket manner, the pace and implementation of fiscal correction depending on attaining
and maintaining a balanced growth path. Policy makers who are unable or unwilling to offer
a politically credible alternative to austerity- a Keynesian-type fiscal stimulus has acquired
the status of anathema in ‘official’ Eurozone politics- opt for this middle-road, all the time
acknowledging that slashing spending and raising taxes have proven to be less effective at
reducing deficits than initially forecast. In fact, simultaneously cutting spending in the
Eurozone policy regime has produced, on account of everyone’s economy being the other’s
‘trading partner and source of income’ (Blythe, 2013), the adverse result: shrinking GDP and
growing debt levels.
Even if the impact of fiscal consolidation on growth can be so great, as to cause debt-GDP
ratios to rise rather than fall (Delong and Summers, 2012)- results on the ground suggest
that euro area government debt rose from 87.3 percent in 2011 to 90.6 percent in 2013 and
is projected to rise further to above 95% of GDP in 2013 – engineering ‘quick’ and ‘frontloaded’ reductions in the fiscal deficits of the periphery has become the single mode of
adjustment. Austerity programmes in Greece, Italy, Portugal and Spain have, in fact, been
driving the periphery in a downward spiral. Worse, recession has now moved from the
periphery to the Eurozone core- as evidenced in the four of the largest euro zone
economies, France, Spain, Italy and the Netherlands –to the EU-27. According to Eurostat’s
May 2013 flash estimates, GDP fell by 0.2 percent in the euro area and by 0.1 percent in the
EU 27 during the first quarter of 2013, compared with the previous quarter; in the fourth
quarter of 2012, growth rates were -0.6% and -0.5% respectively. As it happens, the region's
economy hasn't grown since the third quarter of 2011, while the 27-nation European Union
dipped back into recession, with output falling for a second consecutive quarter (Eurostat,
2013). Eurozone authorities and the IMF are theoretically coming to grips with the austerity
versus growth debate but in reality the debate is still largely held along the lines of what is
the right pace for austerity and what the appropriate time frame is. The IMF, in particular,
whose alleged mea culpa on fiscal multipliers (IMF, 2012b; Blanchard, O. and Leigh, D.,
2013), officially triggered the public debate, has since shied away from presenting a clear
stance on the pace of fiscal consolidation for the periphery countries.
Depoliticise and Rule
Eurozone authorities have not been able to move beyond the austerity vs. growth dilemma,
primarily because they have failed to come up with a credible plan to promote growth;
unable or unwilling to produce a more equitable design for the ‘revamped’ EMU or
articulate a vision for solidarity, they have sought to depoliticise austerity. Depoliticisation
refers to the process of removing austerity programmes from political influence and control,
and presenting them to national electorates as the only available choice for saving the euro
and restoring the confidence of the markets. In depoliticising austerity, they have effectively
chosen to retain the the current system and to unload the burden of adjustment on weaker
members of the monetary union. In the process, they have also chosen to protect the
competitive advantages that some countries enjoy at the expense of others, de facto
undermining the notion that this is a union of equal members.
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Central to the argument presented here is that national and Eurozone elites who choose to
ignore how the continuing diversity of economies and political institutions affects
distributive outcomes within the currency union and within the members comprising it face
the worst of all worlds. For one, the new economic governance, which supposedly reinforces
national discipline through strengthening policy coordination, is bound to falter- there
continues to be no fiscal solidarity ‘counterweight’ or automatic fiscal transfer mechanism in
case members face asymmetric shocks. In addition, the rise in exports and domestic saving
that are theoretically required to offset the decline in government spending, concomitant
with fiscal discipline may not be forthcoming in a number of states facing a loss of
competitiveness and unprecedented and disruptive levels of unemployment. Worse,
enhancing surveillance in order to diminish economic risks still has to grapple with
‘constitutional and institutional obstacles and political sensitivities’ (Begg, 2011: 34).
To take the ‘reformed’ SGP as an example, it has theoretically opened up the monitoring
process to include members states’ compliance with public debt levels as well as budget
deficits; prevention rather than correction ‘forces’ vulnerable member states to focus on
long-term sustainability, identify and correct unsustainable policies. In reality, the decisions
that the Commission has adopted under the Excessive Deficit Procedure (EDP), the SGP’s
corrective arm, in the context of the third European Semester of policy coordination, suggest
that easing up on drastic deficit-reduction plans appears to be- in view of the protracted
recession and the unemployment crisis in Europe- the option by default.
The Commission extended the deadlines for correcting the excessive deficit in six countries:
Spain, France, the Netherlands, Poland, Portugal and Slovenia (Commission, 2013). A twoyear extension was given to France and Spain, correspondingly the Eurozone’s second and
fourth largest economies, as well as Slovenia, while the deadline for Portugal was extended
by one year. Of the other programme countries, Greece has been given two more years to
reduce its deficit below 3 per cent of GDP, Ireland’s policy objective remains the correction
of the excessive general government deficit by 2015, and Cyprus is expected to put an end
to the present excessive budget deficit situation by 2016. The great irony is that, as a result
of this collective drive to austerity, sticking to budget deficit targets is being de facto
annulled, seriously endangering the effort to restore investors’ confidence in the markets,
the way the troika has interpreted it. In fact, with the exception of Germany, Estonia,
Luxembourg, and Malta (for which the Commission has recommended that the Council
opens an EDP), thirteen Eurozone countries are currently under the EDP. This probably gives
a good insight into the probability that the renewed drive to strengthen budgetary
surveillance and coordination of economic and budgetary policy in the euro area will come
to fruition.
The picture that emerges is even more complicated. On the one hand, the efficacy of this
enforcement rigour remains, as suggested above, to be seen- the Commission, for example,
has stepped up the EDP for Belgium, recommending to the Council that it gives notice to the
country to take measures, under Article 126(9), in order to correct the excessive deficit by
2013 (Commission, 2013). For those familiar with the Commission’s pre-crisis functioning,
questions abound: would the Commission attempt to bring into line one of the big nations,
such as France? If Belgium fails to ‘take action’, will the Commission see the procedure
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through, by imposing fines? There is, as it happens, a bigger and more difficult question:
following the adoption of the ‘six-pack’ and more recently the two-pack, the Commission has
acquired considerable powers over vetting Eurozone countries’ budgets, with member
states expected to abide by a common budgetary timeline and common budget rules. How
are European citizens, especially in the periphery, expected to react to externally-imposed
economic priorities, when their lives have been transformed by prolonged recession, high
unemployment, depressed housing prices, and severe fiscal constraints on sensitive
economic sectors, including health and pensions?
Political developments across the Eurozone, from the strong presence in national elections
of the Five Star Movement, led by comedian Bebe Grillo, in Italy, to the demise of the threegeneration Papandreou dynasty and the rise of neo-fascist Golden Dawn in Greece, to the
fall from grace of Fianna Fáil in Ireland, whose electoral support base was diminished by 75
percent in the 2011 national elections, suggest widespread anger at the established political
order. Depoliticising austerity further fuels this anger, with citizens regarding their
governments ‘not as their agents’ but as agents of other states and organisations, such as
the IMF or the EU, ‘immeasurably more insulated from electoral pressure than was the
traditional nation-state’ (Streeck, 2011: 26). Interestingly, the flip-side of this process has
been occurring in the core, albeit with a Eurosceptic twist; it is evidenced in the steady
inroads made in the political mainstream by the National Front in France and the True Finns
in Finland.
Politics has, in fact, come back with a vengeance and the potential fallout from record
unemployment levels cannot begin to be calculated. Eurostat data show that the euro area
seasonally-adjusted unemployment rate was 12.2 percent in April 2013, up from 11.2 in
April 2012. The EU-27 unemployment rate rose to 11.0 percent in April 2013, up from 10.3
percent in April 2012. A closer look at individual country figures shows that the social and
redistributive effects of austerity reverberate throughout the Eurozone, dispersed, as they
are, unequally. A clear core-periphery dichotomy has been taking shape: among the member
states sharing the single currency, the lowest unemployment rates were recorded in Austria
(4.9 percent), Germany (5.4 percent) and Luxembourg (5.6 percent), and the highest rates in
Greece (27.0 percent in February), Spain (26.8 percent) and Portugal (17.8 percent). The
highest increases, compared with 2012, were registered in Greece (21.9 percent to
27.0 percent between February 2012 and February 2013), Cyprus (11.2 percent to
15.6 percent), Spain (24.4 percent to 26.8 percent) and Portugal (15.4 percent to
17.8 percent) (Eurostat, 2013); incidentally, these are the ‘economic adjustment’ and (in the
case of Spain) ‘financial sector adjustment’ programme countries.
The data for youth unemployment is even more disconcerting, mirroring the above trend
and the core-periphery dichotomy. In April 2013, the youth unemployment rate (under 25)
was 23.5 percent in the EU-27 and 24.4 percent in the euro area, compared with
22.6 percent in both zones in April 2012. In April 2013 the lowest rates were observed in
Germany (7.5 percent), Austria (8.0 percent) and the Netherlands (10.6 percent), while the
highest in Greece (62.5 percent in February 2013), Spain (56.4 percent), Portugal
(42.5 percent) and Italy (40.5 percent) (Eurostat, 2013). The picture that emerges is rather
bleak- the high risk of social and civil unrest cannot be underestimated or calculated, while
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there are significant long term economic costs to be considered, including the costs of future
unemployment benefits to be paid out, foregone earnings and taxes; for 2011, a
conservative estimate brought these costs to the equivalent of 1.21 percent of GDP, that is,
an annual loss of €153 billion for the EU (Eurofound, 2012); worse, an entire generation
could become alienated with the European project, marginalised both nationally and at
European level. Given the higher risks of future unemployment, as well as the higher risks of
exclusion, of poverty and of health problems that young people are likely to face, the
Council of Ministers adopted on 22 April 2013 a Youth Guarantee Recommendation (Council,
2013: 1), urging member states to put in place the structures that had been agreed in the
December 2012 Youth Employment Package. While funding from the European Social Fund
and the Youth Employment Initiative proposed in February 2013 (with a budget of €6 billion
for the period 2014-20) could help with the setting up of important apprenticeship,
traineeship, and continued education programmes, the main problem remains that of
creating jobs in the current context of internal devaluation and consolidation of public
budgets.
[Graph 3 about here]
[Graph 4 about here]
The very political character of depoliticized austerity is nowhere more evident that in the
major redistribution of income currently engineered in the affected member states, creating
unequal social outcomes for large parts of their population and threatening political
stability. In the IMF 2012 Fiscal Monitor, where past fiscal consolidation results were
analysed for 17 OECD countries, it is suggested that ‘a consolidation amounting to 1
percentage point of GDP is associated with an increase of about 0.6 percent in inequality of
disposable income (as measured by the Gini coefficient) in the following year’; large
consolidations (greater than about 1.5 percent of GDP) significantly elevate inequality, while
spending-based consolidations worsen it (IMF, 2012: 53-54). As is to be expected, the
progressivity of taxation, measured by the ratio of direct to indirect taxes, is negatively
associated with inequality (IMF, 2012: 54). Evaluated against developments in the Eurozone,
changes undertaken in member states’ tax and benefits systems, together with cuts in public
sector wages have actually reduced the level of real household incomes; while such
measures produce a different impact on high and low income households, the living
standards of low income households are more severely affected (European Commission,
2013:45).
Cross-country research has assessed the distributional effects of fiscal consolidation in nine
EU countries (Greece, Latvia, Lithuania, Romania, Spain, Portugal, Estonia, Italy, and the UK),
implemented after the 2008 economic downturn and up to mid-2012. Using the EUROMOD
model1 (a tax-benefit micro-simulation model for the European Union) to analyse cuts in
cash benefits, increases in income taxes and workers’ social contributions, and cuts in public
sector pay, it concludes that there is considerable variation in the scale of the resulting
aggregate reduction in household income; this ranges widely from under 2 percent in Italy
and the UK to 9 percent in Latvia and nearly 12 percent in Greece. There are, obviously,
1
See https://www.iser.essex.ac.uk/euromod
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differences in the distributional profiles of income losses: in six countries (Greece, Spain,
Latvia, Italy, Romania and the UK) the changes implemented are progressive on the whole,
with richer income groups contributing more in relative terms. Estonia’s distribution of
income cuts is, on the other hand, clearly regressive, while Lithuania and Portugal show an
inverted U-shape pattern, with middle income groups contributing less than low and high
income groups. The differences observed are attributed to the different combinations of
policy instruments adopted, the specific ways in which they were applied, and the
underlying income distribution. It is worth noting that in the six countries where the poor
pay a lower proportion of their income than the rich, the scale of reductions is still large: in
Greece the 10 percent of households with the lowest incomes lose on average 8 per cent of
their income, while in Latvia and Portugal, the figure is over 5 percent. An interesting result
is produced when the approximate effect of the increases in VAT (which do not have an
effect on household disposable income but impact directly on each household’s
consumption potential) is calculated; in each of the countries, the effect is regressive across
the income distributions (Avram et al, 2012: 26).
With social fairness almost thrown out of the window, the point of such exercises is to show
that budget reform can be fine-tuned to protect the vulnerable and avoid burdening them
disproportionately in relation to their household income. The underlying central assumption,
namely that in the face of rising unemployment, worsening living standards and growing
budget deficits, ‘governments can exert some direct control on distributional outcomes and
can make choices’ (Avram et al, 5) has not necessarily been borne empirically. In the context
of depoliticized austerity, governments have been expected to make their fiscal position
sustainable in a relatively short time-period, through significant front-loaded consolidation.
Dependent on the institutional configuration of their national political economies, and, in
particular, on how it models their country’s response to an enduring set of constraints and
incentives, governments have repeatedly had to resort to so-called ‘blunt’ (in terms of their
distributional outcomes) policy instruments- labour market policies and horizontal cuts in
public services have been the preferred mode of adjustment in countries where selfpreserving politicians have been unable to step up their reform efforts to improve tax and
public administration and enhance productivity.
Accentuate the ‘National’ in ‘European’ Varieties of Capitalism
VoC could have safely predicted that coordinated and mixed economies, run by their
national governments, would formulate their different macroeconomic policy responses to
the crisis on the basis of their distinctive institutional complementarities (Hall and Soskice
2001; Hall and Gingerich 2009; Hancke et al 2009; Thelen 2012; Martin and Swank 2012);
what needs to be emphasized, however, is that, at this point in crisis-management, the
continued diversity among European varieties of capitalism in a monetary union which
remains skewed comes with unequal costs. Penalising mixed economies, including the
second, third, and fourth largest economies in the Eurozone bares grave risks for
macroeconomic recovery and financial stability, while jeopardising the political acceptability
of belonging to the single currency. The future of the euro will depend on harmonizing
diversity and finding ways of integrating the different varieties in an equal and fair manner.
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Bringing back the VoC analysis, it is important to note the challenges- for the Euro and its
members- that have been overlooked in the depoliticisation process. For one, the idea of
differentiated, growth friendly fiscal consolidation has been proving, on the ground, a
mirage. While the EU deficit declined from a peak of -6.9 percent in 2009 to -4 percent in
2012 and is expected to fall to -3.4 percent in 2013, with a growing number of member
states having corrected their excessive deficits, growth, as was suggested earlier has been
plummeting; both the Eurozone and EU-27 economies are officially in recession. Repoliticising fiscal policy may in fact offer one way out of the conundrum. Negotiating a
flexible medium-term fiscal policy and differentiating the pace and breadth of austerity
policies based on national economies’ different growth prospects, however, inevitably
clashes with the current drive towards more coordination, through the European Semester,
and more institutionalization of fiscal discipline through the reinforced Stability and Growth
Pact and the fiscal compact.
In reality, re-politicing fiscal policy requires, in the context of a monetary union, the sharing
of fiscal responsibility. The question that emerges therefore is whether the incentives
governing national policy behavior can be re-balanced to accommodate this. Governments
in coordinated economies have no incentive to adopt a more expansionary macroeconomic
stance, which would reduce their current account surpluses; the concomitant loss of
competitiveness would hurt them politically and meet with the resistance of powerful
export sectors; worse, while it would also upset the wage-coordination setting institutions,
at the core of their export-led growth strategies and high savings rates. At the same time,
mixed economies are faced with the Sisyphean task of attaining an appropriate spendingrevenue mix, amidst economically and politically harsh conditions. Against a background of
high levels of unemployment, public debt, and non-performing loans, consolidation
strategies that have relied predominantly on tax rate increases, exacerbating the burden on
already compliant taxpayers, while failing to broadening tax bases (Praet, 2013) need to be
recalibrated. Equally, support for education, research and energy needs to be strengthened
at a time when adjustment on the expenditure side has relied disproportionally on cuts in
government public spending. In this context, active labour market measures, such as training
for the unemployed and individualized job-search advice, become expensive to set up and
run.
Raising competitiveness in the periphery and restoring intra-euro area current account
balances inevitably passes through structural reforms in labour and product markets. In
mixed economies, which lack the institutional complementarities to accumulate external
surpluses from export activity (Carlin and Soskice 2009), wage-setting institutions have been
expected to align wages with productivity trends, as well as reallocate resources away from
non-tradable sectors (such as housing) to tradable sectors. Coordination economies, on the
other hand, associate current account surpluses with the success of their growth model and
are therefore far more reluctant to boost domestic demand, for example by reducing the
high taxes and social security contributions levied on low wages. Even if unprecedented
labour market reforms forced ‘from above’ have prompted improvements in labour cost
competitiveness , these have not been mirrored by proportionate gains in relative price
competitiveness (European Commission, 2012b). The politicization of business activity,
corruption, and rent-seeking, all are typical sources of disruption of institutional
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complementarities, particularly in mixed economies, where skilled labour, the transfer of
technological innovation, and the provision of capital via foreign direct investment are not
central to firms’ performance. Productivity has, in fact, remained weak partly because
governments have been unable to promote competition in products and services markets or
ameliorate entrenched poor performance in education and research. With regard to the
services sector, in particular, the Commission estimates that EU GDP could be increased by
between 0.8 per cent and 2.6 percent if member states were to remove restrictions on the
provision of services in line with the Services Directive (European Commission, 2013); the
highest gains would be obtained in, among other countries, the mixed economies of France
and Spain, the liberal UK economy, and the coordinated economies of the Netherlands and
Austria. It is worth noting, in this respect, that coordinated economies have been reluctant
to remove unjustified restrictions and barriers to entry, increase investment, or make
services more affordable for lower income groups.
Is there a middle ground for making the necessary adjustment more equitable and fair?
Should coordinated economies remove the structural obstacles to the growth of their
domestic demand? They have, after all, developed a set of institutions that provide
economic actors with the resources to negotiate political compromises and solve complex
economic problems (Culpepper 2012); in addition, why should they correct, when they have
secured gains in their competitiveness through wage moderation, productivity gains or
both? For one, moving towards more moderate surpluses may be welfare-enhancing for
their respective populations- this applies to surpluses driven by structural weaknesses
affecting demand, for example, in the financial sector, services, or construction; In addition,
by adjusting, they may trigger positive spillovers on other Eurozone economies through an
array of financial, trade and other interlinkages (Hobza and Zeugner, 2013). There is also an
argument for respecting the political limits of current re-balancing: competitive disinflations
in countries with typically centralised wage setting institutions and inflexible labour and
product markets come with significant social and political costs (Buti and Turrini, 2012),
which are not really sustainable in the medium-term. Provided that they exist, the ‘least
budgetary hard-pressed countries should make up for the contractionary effects of countries
like Ireland, Portugal, and Greece’ (Wyploz, 2013).
Integrating diverse European capitalisms in the monetary union, ‘genuine’ or otherwise,
requires restoring normal lending conditions right across the Eurozone economy. It has been
widely documented and acknowledged that the transmission of monetary policy has been
impaired, with the periphery banking sector experiencing large balance sheet shocks related
to deteriorating sovereign debt. Even if tensions in the financial markets have subsided,
following the ECB’s announcement of its OMT bond-buying programme last year, and even if
the ECB has cut its key interest rate to a record low, elevated risk premia in stressed mixed
economies, like those of Greece and Spain, have tightened access to bank credit for small
and medium-sized businesses substantially. This makes a sharp contrast with large
corporations which still have the option to resort to corporate debt instead of bank loans or,
if they are multinationals, to turn to foreign rather than domestic loans- as has been the Irish
case (De Fiore and Uhlig, 2011). SMEs, however, are critical for economic recovery and job
growth, as they employ around three-quarters of the euro area’s workforce and generate
around 60 percent of its value added (Cœuré, 2013). Together with the political
11
determination of governments to proceed with measures that support the financing of
SMEs, the restructuring and strong capitalisation of banks is an important condition for
restoring the smooth provision of credit to euro area corporates and households.
Conclusion: Sharing the Costs and Benefits
Redirecting European varieties of capitalism towards a more sustainable and balanced path
is not an easy task. Domestic and external economic imbalances arose as an inherent byproduct of distinct demand-led and export-led growth models operating within the
constraints of an imperfect and mismanaged monetary union; they will not necessarily be
eradicated once global and domestic economic conditions normalise. For one, there is the
question of whether the ‘new’ framework being built up will guard against imbalance
accumulation: theoretically, public deficit and debt limits will be enforced more diligently
and universally, while new procedures such as the Macroeconomic Imbalances Procedure
will monitor international financial imbalances and competitiveness indicators. If compliance
is to work this time (it blatantly failed pro-crisis) however, projecting a single growth model
on to a Euro area of coordinated and mixed economies will simply not do. The current
framework continues to omit mechanisms that foster institutional and productivity
convergence or incorporate orderly risk-sharing and redistribution mechanisms to guard
against unforeseen shocks (Bertola, 2013). In the absence of a fiscal union or a federal
government, however, important issues of distributive outcomes and sharing the costs and
benefits of belonging to a monetary union will eventually have to be addressed.
Bringing national politics back in is necessary. National leaders need to recapture public
policy space, if only to assuage their electorates that they have their own vision for their
national economies, one that includes more policy options than internal devaluation and
structural adjustment. Institutionalising, centralising and co-ordinating fiscal discipline does
not necessarily guarantee an acceptable economic future for Eurozone’s citizens. In fact,
Eurozone authorities’ ongoing crisis response raises serious doubts as to their ability to
move beyond the continuing asymmetric shock. In this context, a more symmetrical
rebalancing and burden sharing will go a long way, particularly when the deficit of solidarity
between the member states appears to be growing. Can ‘Europe’ become more than the
sum of its new economic governance goals, two rescue funds, one deficit-limitation treaty,
and one blueprint for a future Genuine Economic and Monetary Union? While economic
arguments- related to growth and convergence of standards of living have time and again
been used to justify integration and establish its legitimacy-, what is now urgently required is
a popular narrative that goes beyond the project’s economic justification.
12
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